Cohu (NASDAQ:COHU) Q4 2018 Earnings Call

0:00 Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Kohl's Incorporated Fourth Quarter 2018 Financial Results Conference. At this time, all participants are in a listen-only mode. If anyone needs assistance during the conference, just press star and zero for an operator. Later, we will have a question-and-answer session. And as a reminder, this conference is being recorded. Now it's my pleasure to turn the call to Rich Yeganian, Vice President of IR. Thank you, Carmen. Good afternoon and welcome to our conference call to discuss Kohu's fourth quarter and fiscal year 2018 results and first quarter outlook for 2019. I'm joined today by our President and CEO, Luis Muller, and our Vice President of Finance and CFO, Jeff Jones.

0:47 If you need a copy of our earnings release, you may access it from our website at www.kohu.com or by contacting Kohu Investor Relations. There is also a slide presentation accompanying today's call that may be accessed through the webcast link on COHU's website. It is also posted as a PDF in the investor relations section. Replays of this call will be available via the same page after the call concludes. Now to the safe harbor. During the course of this conference call, we will make forward-looking statements reflecting management's current expectations concerning the company's future business. These statements are based on current information that we've assessed. but which by its nature is subject to rapid and even abrupt changes. We encourage you to review the forward-looking statement section of the slide presentation and the earnings release, as well as COHU's filings with the Security and Exchange Commission, including the most recently filed Form 10-K, Form 10-Q, and registration statement on Form S-4. Our comments speak only as of today, March 12th, 2019, and COHU assumes no obligation to update these statements as a result of developments Thank you very much.

2:20 I will provide commentary on the fourth quarter in fiscal year 2018 results. I'll also discuss the current business environment, provide an update on the integration of XERA, and share our thoughts on the industry prospects for 2019. Cohue's fourth quarter sales of $170.6 million were within guidance for the first reported period reflecting the combination of Cohue and XERA. following the close of the acquisition on October 1st, 2018. Non-GAAP earnings per share of 24 cents was better than expected and reflects the strength of the business model. Although the mobility market has weakened since early last fall, there was one positive exception in the fourth quarter as a customer drove volume demand for our testers, handlers, and contactors to support production plans for a new device launch in 2019.

3:23 Holding up relatively well were the automotive and data center, cloud, and AI semiconductor markets. We had a particularly strong quarter for analog IC test with customers driving demand for our testers, gravity handlers, and power analog contactors. While not all customers serving this market continue to see a strong demand into the new year, several are maintaining a bullish outlook. We also had several design wins in the quarter. Our tri-temperature pick-and-place handlers were qualified at three new customers and we capture a new win in the European automotive semiconductor market with our turret inspection platform.

4:08 We continue to see demand for our testers used in engineering for 5G applications which are expected to ramp in high volume later this year We also had multiple design wins with the X-Wave contactor at a leading mobility customer testing 5G antenna modules, power amplifiers, and transceivers. Several early adopters of this contactor have begun ramping volume manufacturing for automotive radar applications. Despite weaker market conditions, Cohus still delivered growth year over year, including the contribution from XTERRA Annual sales reached $451.8 million and non-GAAP earnings per share of $1.49.

4:57 We're not immune to the same market weakness affecting many semiconductor and semiconductor equipment companies. This includes the impact of continued softness in the mobility and IoT markets that started last fall and persist into the beginning of this year. Uncertainty around the U.S. and China Thank you very much. We're only now emerging from what is typically the seasonally weak period for the industry.

5:54 At this point, we have not seen any significant change in tone or sentiment from our customers. There are some bright spots, but overall customers see market weakness continuing into Q2 while expecting a return to growth as we approach the middle of the year, resulting in a stronger second half. This view is consistent with several customer-specific projects we have been working on that are expected to ramp in high volume later this year. Our latest data point from a December survey showed equipment utilization at approximately 81%, which is down three points quarter over quarter. This is consistent with what we could expect given the current market conditions.

6:42 As for the integration of XTERRA, We announced a plan in late November to rationalize our global handler and contactor manufacturing operations, resulting in the closing of facilities in Penang, Malaysia, and Fontana, California, by the end of this year. These facility closings are expected to eliminate about 280 positions and reduce costs by approximately an $8 million annual run rate by the end of 2019. We have also communicated to customers plans to consolidate certain handler product lines that are expected to lead to additional reductions in operating expenses and improvements to gross margin in the second half of 2019.

7:29 More recently, we have agreed to an early termination with our distributor for Xera products in China and Taiwan, effectively going direct in these regions starting tomorrow, March 13, instead of the previously announced date in September 2019. This is expected to help accelerate profitability of business generated in these regions and increases ability into new business opportunities. You may recall we committed to $20 million of annual run rate cost synergies within the first two years of the acquisition. And these actions put us about a year ahead of schedule. Turning to 2019, We forecast the non-memory market for semiconductor test and inspection to contract approximately 10% to 15% year-over-year.

8:22 We estimate the non-memory handler market, our largest segment, to be about $600 to $650 million in 2019, and the SOC tester market likely to be in the range of $2.1 to $2.3 billion. We also expect the inspection market to decline approximately 10% and model the contactor and PCB test markets to be about flat year over year, with 5G infrastructure and other millimeter wave applications offsetting some decline in traditional product segments. All of these estimates assume our customers' expectation of a mid-year recovery takes shape. Our work on 5G solutions is starting to turn into meaningful business.

9:09 Our PCB test is leading the way with new high-accuracy methods to test the quality of back drills, a critical concern for high-frequency signal transmission. Our millimeter-wave contactors continue to win new opportunities while existing customers are starting to ramp in volume production. There's optimism that investments in 5G-related infrastructure will accelerate into the second half of the year. And if so, that should also translate into initial volume orders for testers and handlers. Overall, we expect the semiconductor market will continue to grow over the midterm, not only due to 5G, but also from the continued expansion of semiconductor content in automobiles and industrial equipment, the proliferation of sensors in IoT and IOV applications, the adoption of Industry 4.0, and the general growth in data creation, storage, and processing.

10:09 Now, I'd like to turn it over to Jeff to review our fourth quarter results and provide first quarter guidance. Okay. Thanks, Luis. Let me begin by reviewing Cohue's fourth quarter financial results, which demonstrate the strength of our business model as we generated Non-GAAP operating margin of $11.3 million and adjusted EBITDA margin of $13.7 million on sales of $170.6 million. COHU delivered approximately $2 million of cash from operations during the fourth quarter. Our cash balance decreased sequentially by $6 million to approximately $165 million at the end of the quarter due primarily to cash expenses related to Synergy Savings.

10:56 For Q4, the GAAP to non-GAAP adjustments include approximately $4.6 million of stock-based compensation expense, $900,000 due to the reduction of an indemnification receivable in connection with the Azmeca acquisition in 2013. GAAP to non-GAAP adjustments primarily driven by the XERA acquisition include $14.1 million of purchased intangible amortization expense, $16 million of inventory and property plant and equipment step-up costs, $38.2 million of restructuring costs related to product and to life inventory and employee severance charges, and approximately $4.6 million of acquisition costs.

11:44 For Q4 2018, the net cash impact of these items is approximately $8 million related to employee severance, and 4.6 million for acquisition costs. My comments that follow, including our Q1 2019 guidance, are all based on CoachU's non-GAAP results, which exclude the impact of these items. For fiscal year 2018, the company achieved record sales of 451.8 million, including one quarter of XERA sales. For the full fiscal year, we generated non-GAAP operating margin of 14.1% and adjusted EBITDA margins of 16.5%.

12:29 Cohue delivered approximately $34 million of cash from operations during the year and our cash balance increased $9.4 million. As I mentioned, sales for the quarter were $170.6 million. No one customer accounted for 10% or more of sales in the quarter or for the full year 2018. Q4 gross margin was 44.5% and higher than our guidance of 43% due primarily to favorable product mix. Operating expenses for the fourth quarter of 2018 were 56.6 million, approximately two million lower than guidance due to lower labor costs in response to soft business conditions.

13:21 Our non-GAAP effective tax rate for Q4 was 33%, including a 1.5 million accrual for withholding taxes related to anticipated future cash repatriation. From a synergy perspective, the integration of XERA is happening on an accelerated pace. We expect to achieve our target of 20 million in annual run rate cost synergies within the first year, essentially 12 months ahead of schedule. The $20 million in total reflects approximately $6 million from cost of goods sold and approximately $14 million in operating expense savings. The main factor in accelerating the timing of the synergies was the factory consolidation within our handler and interface product operations.

14:12 Another factor is the earlier than initially anticipated termination of the third-party distribution agreement for Taiwan and China. Our midterm target within the next three to five years is to double the initial first-year synergies by another $20 million for a total of $40 million through additional facility consolidations and manufacturing optimization. Revenue from our recurring business, which includes sales of our test contactors, as well as equipment, service, and spares, represented 46% of total revenue for the fourth quarter. The recurring revenue is composed of three main sources.

14:57 Interface products, which is mainly test contactors and pins, service revenue for our installed base of capital equipment, and spares that also support the installed base. Over the next few years, we expect the test contactor portion of the recurring revenue stream to grow significantly through cross-selling efforts and the adoption of our market leading millimeter wave test contactor for 5G and automotive radar applications. Contactor sales were approximately 31 million in Q4, which represents an annual sales rate of approximately 125 million. Based on our handler market position and our current attach rate for contactor sales, we believe we have an opportunity to grow this business to near 300 million over the next three to five years. Now, turning to Cohue's balance sheet as of December 29, 2018, the overall increase in the assets and liabilities compared to prior periods is, of course, a result of the XERA acquisition.

16:05 At the end of 2018, we had approximately $165 million in total cash and investments. Accounts receivable, DSO, was at 79, and inventory days was 106. Gross debt at the end of 2018, including the term loan B and the bank debt assumed in the QIDA deal, totaled $359 million, or $194 million net of cash. During Q4 2018, debt repayment totaled approximately $1.3 million, and interest expense was about $4.6 million. Fixed asset additions in Q4 were approximately $2.5 million and depreciation was $4.7 million.

16:53 Deferred profit at the end of December was $6.9 million, up $5 million from the third quarter. The related deferred revenue at the end of Q4 was $10.4 million, up $6.8 million sequentially. Our long-term cash strategy continues to be maintaining $125 million of cash on the balance sheet to support operations, capital expenditures, and the dividend. We intend that cash generated in excess of $125 million will be used to pay down the debt and de-lever the company. Given current business conditions and upcoming cash requirements to achieve cost synergies, we plan to make the minimum debt repayment during Q1, which approximates $1.3 million.

17:40 Co-U's Board of Directors previously approved a quarterly cash dividend of $0.06 per share payable on April 12, 2019 to shareholders of record on February 26, 2019. And now for the first quarter 2019 guidance. We're expecting sales to be approximately $145 million. Revenue distribution is expected to be 92% semiconductor test and inspection and 8% PCB test. Gross margin in Q1 is expected to be approximately 40%. Operating expenses are expected to be approximately 54 million, which includes realizing total cost synergies to date of approximately 2.5 million or 10 million on an annualized basis.

18:31 The effective tax rates for periods which are slightly above or below break-even is not meaningful. For Q1, we expect the tax provision to be nominal to zero. For the full year 2019, we're estimating an effective tax rate of approximately 22%. The diluted share count for Q1 is expected to be approximately 41.5 million shares. Over the midterm, We're targeting gross margins of 48% and EBITDA of 22% on quarterly sales of approximately $235 million. Profitability targets include the benefit of annual cost synergies totaling $40 million that I discussed previously.

19:19 That concludes our prepared remarks, and now we'll open the call to questions. Thank you. And ladies and gentlemen, if you have a question, just press star and one on your touch-tone telephone. If your question has been answered or you want to be removed from the queue, press the pound key. Again, to ask a question, just press star and one. And our first question is from Brian Chen with Steve Hill. Your line is now open. Hi, good afternoon. Thanks for letting us ask a few questions, and thank you for the for the comprehensive slide deck. That's definitely appreciated and great to hear from you guys again. Maybe first question, I'm just curious, in terms of the sequential sales decline in Q1, is it fair to think this is more attributable to the industrial and auto markets?

20:07 And I say that, you know, going back to your comments, wireless sort of weakened, you know, 3Q last year and those markets maybe have seemed to have kind of accelerated to the downside more recently. So number one, is that sort of a fair A way to characterize that. And also, I know you provided some qualitative commentary on the potential for some sales take up in second half. But, you know, in terms of Q2, which we're almost into now, can we infer that current order trends maybe suggest kind of a flattish 2Q relative to 1Q? Hi, Brian. This is Luis. So to your first part of the question, yeah, you're correct in your assumption. As I stated earlier, The mobility IOT markets were weak in the fourth quarter, but industrial automotive, actually AI data centers still held relatively well. But going into 2019, in the first quarter, we have seen softening also in the automotive and industrial markets.

21:09 So your assumption about the markets were correct going into 2019. And for the second part of the question, As I stated as well, we do see our customers having about the same sentiment for the first half of the year as they are now in this stage of the game. Needless to say, this industry has some seasonality. Q1, Q4 tend to be weaker points in the cycle. But by and large, we think any significant improvement would happen in the second half of the year and this is more based on the projects that we currently have with customers for new device launches and the timing of those volume ramps.

21:56 Okay. Yeah, that's helpful. Maybe I have just two other questions. First, in terms of the financial model, is roughly $150 million kind of the right accounting breaking level for the company? And I'm just curious if there's any temporary cost reduction measures that you're either taking or planning kind of beyond sort of the permanent reductions you've already communicated, just given the recent pullback in the business. Hey, Brian, it's Jeff. You know, the break-even is closer to 140, the 140 mark, and some of the cost reduction actions that we've taken, you know, we've pulled a few levers in terms of reducing travel, some discretionary spending, if you will, but really haven't taken a significant amount of permanent reductions at the moment. So as we move forward, we're going to capitalize on additional cost synergies.

22:53 With today's structure, I would say break-even is in that 140,145 range. But in the future, that will be declining as we reduce op-ex and improve gross margin. And then one last question, perhaps back for Luis. Just looking beyond sort of the current cyclical weakness, just at a test contact or business, you kind of reiterated that starting from a 120, maybe 125 million annual run rate, going to 300 million over the next, let's say, three to five years. That's a pretty robust growth rate, even over that horizon. So I'm kind of curious. I think the narrative supporting that growth is pretty well understood and straightforward in terms of your large installed base.

23:38 But I was hoping maybe you could, Luis, you could provide a couple insights into the key factors that will influence the rate of customer adoption in that business and kind of which markets or device types you see as most ripe for the picking. Okay. Brian, let me just correct a few things here. We are at about 125 million run rate annual on the contact search. We have said that if we can get to the 100% attachment rate on our handlers, it would take that business up to $300 million. Now, with that said, we're also modeling about a 10% CAGR in the business today. So, if you think about it, you're not going to get you $300 million in this three to five year horizon, just to correct that statement.

24:24 As far as where do we see the attachment, right? We see some of the greatest opportunities are actually in the automotive and industrial applications with our large fleet of handler install base, as well as in the sort of the millimeter wave applications, whether it's high-frequency RF or radar device test, where we do have very unique solutions and good opportunities in conjunction with our testers. Okay, great. Thanks so much. Thank you. Our next question comes from Tom Deasley with DA Davidson. Your line is now open. Yes, good afternoon. First, just a clarification on the last question.

25:10 Did you say the 10% CAGR was your expected growth on the contract business or that's the market growth? Yeah, that's our expected growth, Tom. Okay. All right, that helps. and then maybe one more clarification. Earlier in the script, you talked about a 10% to 15% decline. Was that for both the tester business and the handler business, the non-memory portion? The 10% to 15% decline was for the aggregate, the total addressable market that we serve, handlers, testers, test contactors, all in aggregate, essentially semiconductor tests and inspection as well. Okay. I was just kind of curious if there was Any meaningful difference between the main tier segments, you know, is test or handlers weaker than one another?

25:59 Small differences, you know, nothing earth-shattering. There are some small differences in our modeling of the handler and the tester market, but like I said, very small. We do model the contactor market to stay about flat year on year, and that's essentially some of the new applications, particularly millimeter wave and 5G offset and decline on sort of standard products. Okay. And then kind of stepping back and just looking at your utilization rate of 81%. Yeah, it sounds fairly healthy for a back-end rated company. So is your thought that you don't have a lot of excess tools in the field and as soon as end market unit growth returns and you'll pretty quickly get a return to growth?

26:50 Yes, Tom, that's how we feel as well. The 81% down from the third quarter is still significantly better than we have seen on past soft market conditions. So, yes, we do expect that on a market upturn, we wouldn't see much of a delay between our customers going up and we seeing our business pick up. Okay, great. And then finally, Jeff, when you look at the reduction in the expenses, it sounds like there's already about a $10 million run rate that's reflected in the OPEX guidance. What's the timing of the other $10 million or so this year? Is it more second-half weighted?

27:40 Well, we're on about a $10 million run rate now, right? So by the Time we exit 2019 will be on a $20 million run rate. Of course, that 2.5 will pick up in the second half of the year. So I'm expecting in Q4 that we're likely going to be somewhere in that $4 to $5 million a quarter range based on what in terms of the actions that we'll kick in and be realized over the next two to three quarters. Okay, and then how much would that be offset by variable increases in expenses just based on a stronger second half of the year?

28:35 Well, yeah, so it all depends, right, on where the revenue goes. So, again, I can give you where we are today, right, and OPEX hovering around 37% at the model which has significantly higher revenue. We're modeling OPEX at 28%. And then in terms of OPEX spending, if you will, the midterm model includes all impact of the synergies, total synergies and so from where we are in Q1 of about 54 million in operating expense, we're estimating an increase of about 10 million in OpEx in order to achieve that increase to 235 million of quarterly sales from where we are in Q1.

29:36 Let me just add one more thing here, Tom. We are here effectively eliminating now one of the biggest Okay, so it looks like if you, you know, over the next $90 million of growth, there's about $10 million of incremental expenses, so 10% increase rate. Okay, well, thank you very much. All right. Thanks, Tom. Thank you. And our next question is from David Dooley with Steelhead Securities.

30:22 Please go ahead. Your line is open. Yeah, just a couple of clarification questions. With you, I guess, eliminating the agreement of distribution early in China and Taiwan, is there any negative or positive revenue impact from that particular change? Yes. There's really no impact other than we are now having increased visibility into our customers' plans and more direct contact into aligning our development roadmap to their needs, something that I view honestly as a positive, probably even over the short term as a positive. But no, there's absolutely no negative revenue impact that we can pinpoint right now.

31:14 Okay, and then gross margins were much better in the current quarter than your guidance, and then they're taking a fairly significant decline in the current quarter. Could you just talk about the mix of business and why gross margins were better in this current quarter and why they perhaps are going down sequentially in the upcoming quarter? Dave, so as I mentioned, it was mix-related, really, in Q4. When we achieved 44.5%, we had guided to 43%. We had more recurring revenue than we had forecast. And in the mix of the products, we had a little bit higher revenue than anticipated on the tester side. And as you know, that margin is higher than some of our other systems.

32:05 Then as we look at Q1, that mix, Thank you very much. I'm a little confused because I thought, Jeff, you mentioned that getting the incremental revenue in the test contactor business would take three to five years, but then, Luis, I thought you just mentioned that it wasn't that time frame. So if you could just help us understand on this particular point, you know, picking up the incremental, I guess, $175 million that you've been talking about, the timing of that and how it should unfold over the next couple years.

32:54 Dave, this is Luis. We don't have a timeline yet. laid out for picking up $175 million. What we did say is we have a $300 million opportunity on 100% attachment rate on our handlers, and we are modeling a 10% CAGR, at least for this year. We'll see how we can develop that for subsequent years. But at least for this year, we're modeling a 10% CAGR. So I guess you can see it's not going to get to $300 million in three years, but it should eventually trend towards getting there. Okay, that's it for me. Thank you. Thank you. And our next question is from Stephen Maraccia with Capital Securities.

33:39 Your line is now open. Good afternoon, Luis and Jeff. Hello. Two questions. You talked about first quarter debt reduction of about $1.3 million. Have you stated a target for the balance of 2019 or for 2019 all total? No, no, we haven't, Steve. What I did was reiterated our longer-term position on cash, targeting to maintain about $125 million for operations and the balance used to delever. And again, though, with soft business conditions that we're in, with some cash requirements in order to achieve some of the upcoming cost synergies, we've decided in Q1 to pay the minimum as we did in Q4. Okay.

34:34 A second question, more of a generalized question. That is, in terms of development of the 5G market here in the U.S., and there are talks that the administration wants to keep away from participating in the build-out of the 5G market, have you guys talked to any of your customers about how that might affect them and potentially their revenue streams towards you? Well, Steve, in the end, the 5G is, and frankly anything in the semiconductor industry, is a global reach. So certainly any delay in the U.S. market would have a negative impact if it delays getting to 5G. But nevertheless, our customers are selling products globally.

35:22 So I don't see 5G in totality being delayed. I actually... Much of the contrary, I think 5G is being accelerated. Okay. Thank you very much. You're welcome. Thank you. Our next question is from Craig Ellis with B. Reilly FBR. Your line is now open. Hi, this is actually Peter Pan calling for Craig Ellis, and thanks for taking our question. On fourth quarter, the sales, it seems a little bit lower versus expectation. Was there any end markets that weakened relative to your expectations? Now, Peter, I would say that we were within the guidance that we gave.

36:09 You're right, it was slightly below the midpoint, but every time that we examine forecasted revenue, we always have some upside and risks. And so I wouldn't pin it on any particular segment or industry. Got it. Okay. Okay. And then on the transition to the direct customer model, should we be expecting some kind of upward OPEX pressure in the second half, just given the transition? Over the last quarter, we've been building up our application engineers in Taiwan and China as we prepare for this transition.

36:54 While we are still paying commission to the distributor, you know, we'll be non-gapping out some of those sort of redundant non-productive costs, if you will. As we transition away and the commission goes away, then, you know, we will have the head count in place servicing our customers. So I wouldn't anticipate any future, any pressure in the second half as a result of that. In fact, as it entirely goes away, there should be a net cost synergies. Once we're completely transitioned out, we're obviously direct as effective tomorrow, but when we're completely transitioned, they will contribute to the cost synergy values.

37:42 And then on the tax rate, is low 20s still the tax rate assumptions kind of going forward? Yeah, as we see it right now for the full year, Peter, it's the low 20s. I did make a comment about Q1 in particular and really any quarter where you're around break-even, a little above, a little below, the rate really sort of goes out the window. It becomes not meaningful at such low levels of profitability or break-even. But in general, for the year, the view is still in the low 20s. Okay, got it. And one final question for me is you talked about the industry growth and contactor being 10% versus...

38:34 So that's a good question. I mean, like I said, we see the overall semi-test and inspection going down 10%, 15% year on year, so the market contracting. As you know, we do have a target to continue to gain market share. Now, I can't tell you exactly how those are going to balance out, but certainly market share gain does require qualification of products. There's a time for those things to happen. So in aggregate, I would say this would be a contraction year. I think our market share gains and our growth in contactors are not likely to offset a 10% to 15% contraction in the overall test and inspection market.

39:25 Great. Thank you, guys. You're welcome. Thank you. And our next question comes from Quinn Bolton with Needham & Company. Your line is now open. Hi, guys. Thanks for taking my question. I might have missed it, so I'll apologize, but did you give for the March quarter a sense of the equipment versus the recurring revenue, how those two businesses trend into the March quarter? Hey, Quinn. It's Jeff here. No, we didn't. We tend to give a look back on that, but it's been fairly consistent. It's been anywhere from, I would say, low 40s to high 40s, so I think 45%, 46% is a good proxy.

40:12 So I guess if that's the case and it holds flat, then recurring revenue drops about the same amount Yeah, Quinn. The percentage I gave was historical, right? So you make a good point. In the reduced revenue levels, that recurring piece of the business has less fluctuation. And so that's going to be higher in periods similar to Q1. That's going to be in the high 40 range.

41:03 So it's going to be at the high end of that range that I gave you. We haven't modeled it this way, but we'll talk about it once we close the quarter. I wouldn't be surprised if it doesn't – completely flipped relative to the fourth quarter, meaning a low 50% recurring and a mid-40% system, so sort of a complete 180 degree. So it should see less volatility than the equipment business, it sounds like. Okay, yeah, I just wanted to make sure that was clear. Absolutely. Yeah, it does. Great. Absolutely. The other question I had is, you know, as you make this transition from a DISTI to a direct model in China and Taiwan, I assume that DISD historically was responsible for demand generation, is that right?

41:48 That's right. And so as you bring that in-house, and you talked about building out the application engineer support, what happens to sort of the customer lists? I mean, I would think that DISD potentially is pretty protective of its channel and its contacts. I mean, are they obligated to kind of hand over, you know, kind of those customer lists, or is part of your – Building out the application engineers, kind of also building out that sales channel yourself and having to kind of go out and find those customers. So two pieces. The less relevant one first, yes, they're obligated to transfer all the information in the customer lists, but that's the less relevant part.

42:33 The more relevant part is Xterra had already built A test applications engineering team in Taiwan and in China, I want to say started about a year and a half, maybe a little more than a year and a half ago when they first actually had an attempt of separation with that distributor and eventually came back together and agreed to put a customer applications team in place in both countries. And that was actually by customer demand to deal directly with Xera at the time. So fast forward to today, we do have direct contact with the customers. So we know who the customers are. We know the people.

43:19 We talk to them on a regular basis. We do projects together with them on a regular basis. And then we augment those projects with the distributor resources who then are responsible for actually managing the commercials. So switching to tomorrow where we go direct, officially, all intents and purposes, we know exactly who to deal with, and we already set up as a vendor at the customers, the final customers, supply chain infrastructure. So not really much of a transition from that regard. So you're just kind of going direct across the entire business. You're kind of completing that process rather than... What we really had to do, Quinn, is we had to hire and train additional test applications engineers to augment the infrastructure we had.

44:12 We had to hire additional service engineers to augment the infrastructure that COHI brought to the table here in those two countries where COHI was already direct. So it's not really a stock of an organization. It's more of an increase in the headcount of an organization that was relying on the distributor to fill in the gap. Great. Thank you. You're welcome. Thank you. And ladies and gentlemen, as a reminder, to ask a question or comment, just press star and 1 from your touch-on telephone. And we have a follow-up from Tom Diffley with DA Davidson. Please go ahead. Yes, and thank you for the follow-up. Just one more question on the early termination of Spirox. Do they hold any inventory, or is there any kind of an inventory build you need to do with your own facilities going forward?

45:08 Yeah, we're working through that, Tom. They do have more or less demonstration equipment that we are going through and determining which pieces of equipment that we will require and essentially purchase back from them. So we're going through that process right now. Okay. And then finally, what about service and spares? Does it have a meaningful component of service and spares to the business, or is it mainly new equipment? Yeah, mainly new equipment. Okay. Thank you. Thank you. And, sir, I'm not showing any further questions in the queue. I would like to turn the call back to Richard Yeganian for his final comments. Thank you very much for everyone joining us on the call this afternoon and evening, and all have a good night. Thank you.

46:00 Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day.